Banks’ Risk Exposures and the Zero Lower Bound

Seminario de Investigación del IIEP

Banks’ Risk Exposures and the Zero Lower Bound

Expositor | Andrés Schneider | Federal Reserve Board

Ocupa el cargo de Economista Principal en la división de Asuntos Monetarios y Financieros en el Board de la Reserva Federal en Washington DC. Sus investigaciones se centran en la interacción entre los precios de activos financieros y la dinámica macroeconómica. Andrés estudió en la licenciatura en economía de la FCE-UBA, en la maestría en economía de la UTDT y en el doctorado en economía en UCLA.

Abstract

I show that the presence of a zero lower bound (ZLB) on the short-term interest rate, irrespective of whether it is binding or not, incentivizes risk averse bankers to increase their risk exposures when interest rates decline and realize losses when in- terest rates increase. The incentives come from bankers’ desire to hedge against a non-linear deterioration in their investment opportunities caused by low rates (i.e., lower deposit spreads, lower term premium, and lower yields due to unconventional policies implemented at the ZLB). Bankers with a stronger deposit market power, as well as bankers that are more risk averse, have relatively more incentives to increase their risk exposures when rates decline.